Gelman and the Economists.

Andrew Gelman, professor of statistics, believes that “a quick rule of thumb is that when (1) someone seems to be acting like a jerk, an economist will defend the behavior as being the essence of morality, but when (2) someone seems to be doing something nice, an economist will raise the bar and argue that he’s not being nice at all”.

I think he is right. Readers should pay attention.

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If one were to believe the always vocal Keynesian economists the economy is full of paradoxes and they alone mastered its workings. To demonstrate that one only needs to mention the “paradox of thrift”.

Described by Keynes himself, readers are likely familiar. A quick reminder, in case they aren’t. Thrift, conventional wisdom and Aesop’s fable of “The Ants and the Grasshopper” say, is a moral virtue: one prudently saves for the rainy day and that brings financial security.

Well -- Keynesian economists oppose -- what may seem reasonable for one individual leads to unintended consequences when all individuals act in the same manner. Some may invoke the fallacy of composition as reinforcement. At any rate -- they explain --  too much saving from income leads to low spending, which leads to low sales, low production, low employment, low incomes and … low savings. Thrift is self-defeating (Gelman’s case 2). Public loss was the unintended consequence of private virtue.

And after The Lord provided them with the Philosopher’s Stone that turns wisdom into folly and back, at their discretion, his legitimate children quickly discovered a true armoury of paradoxes, to deploy against their opponents.

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In liberal democracies, where arguments’ only real value is political expediency, those paradoxes clearly are useful rhetorical weapons. The Keynesian eagerness is understandable.

Paradoxes, however, have weaknesses.

Observe the text emphasised above. Post-Keynesians may hate to hear this, but when they speak of “paradoxes” they are unwittingly invoking their opponents’ notion of “unintended consequences”. Readers need not take my word for that. Whether it was a Freudian slip or not, I can’t say, but if readers check that link (repeated here) they’ll discover what seems to be old news for Marc Lavoie. I am not misquoting him out of context, instead he is being quoted approvingly by a fan, presumably knowledgeable. He used that notion, and -- more importantly -- it fits. The idea being that the economy is a complex system whose behaviour transcends and may contradict that of its components.

In fact -- and this too may shock both internet Keynesians and their Austrian arch-foes -- The Lord did not create the “paradox of thrift”. Its creator was Bernard Mandeville (1670—1733) in his poem “The Fable of the Bees: or, Private Vices, Publick Benefits”, from where it took its name: “private vice, public benefit paradox”. Public benefit as the potential unintended consequence of private vice.

But it’s in the version Adam Smith (1723-1790) popularised that the paradox was first made acceptable to the public:

“He [i.e. a capitalist] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Let me disabuse readers of the idea, perhaps fostered by Smith’s careful phrasing, that that pedigree has only historical interest. Paradoxes are two-edged swords and unintended consequences may also run the other way.

Enter Gelman’s astute remark #1 about everyday economic disputes.

Take for instance the case of price gouging, which had unpleasant consequences for Tim Worst-of-all when he tried to defend it recently (it had less unpleasant consequences for Matt Yglesias a few years earlier). When emergencies like a hurricane disrupt the supply of an essential good, as bottled water or petrol -- the argument runs -- price gouging signals the existence of unmet demand. As “entrepreneurs” rush to profit, supply goes up, prices fall and demand is met. In this argument, thus, price gouging, like thrift in the “paradox of thrift”, is self-defeating.

Judging by anti-price gouging almost universal legislation, it seems most people -- myself included -- find arguments like that unacceptable. Others, of course, find it perfectly reasonable, condemn such laws and dismiss the argument behind the “paradox of thrift” as nonsense.

The point here, however, is that in essence is the same consequentialist reasoning. The difference being that in one case moral individual behaviour allegedly has harmful collective unintended consequences (private virtue, public loss), in the other immoral individual behaviour allegedly has beneficial collective unintended consequences (private vice, public benefit).

The difficulty in choosing one or the other is that it is not a priori obvious -- to me at least -- why one, depending on one’s political stance, should consider one the distillation of wisdom and the other mumbo jumbo. I could subscribe to the second part of Gelman’s view: “I’m not saying I think economists are mean people; they just seem to have a default mode of thought which is a little perverse.” And there seems to be reasons to doubt the empirical consequences of at least one of the post Keynesian “paradoxes”.

The way out of that contradiction (or perversion) I can find is to be highly skeptical of both arguments. But that’s me. It’s the readers’ opinion that matters.